Sterling has moved lower today and safe haven currencies have rallied as market risk sentiment sours.
Stock markets across Europe and Asia have slumped this morning amidst growing concerns around a US economy slowdown. This has largely been triggered by weaker-than-expected US jobs data out on Friday afternoon. The US nonfarm payrolls report for July came in at 114k versus expectations closer to 175K, but the bigger surprise surrounded a jump in the US unemployment to 4.3% versus expectations (and previous reading) of 4.1% This – combined with some more recent weaker US data – may indicate that the US economy is struggling to bear the consequences of sustained higher interest rates. This has ramped up market odds for heavier interest rate cuts from the Fed (including a potential 0.5% cut next month) and therefore weakened the USD.
Growing fears of a deepening conflict in the Middle East have further boosted the flight towards perceived safe-haven currencies (e.g. Japanese Yen and Swiss Franc). Iran has promised to retaliate heavily after the assassination of Hamas leader Ismail Haniyeh on Iranian soil. Over the weekend, Iran-backed Hezbollah confirmed they launched dozens of missiles on Israel and concerns are growing over how far Iran will go with their reprisals.
As a result, the US dollar has been suffering from the repricing in interest rate expectations which has pushed the EUR/USD rate up nearly 2-cents from Friday’s low and to a 5mth high. This move out of the USD and into Euro – combined with Sterling’s sensitivity to risk aversion – has dragged the GBP/EUR lower by over 2-cents from Friday and it now trades at an 11-week low. The GBP/USD has been choppy but continues to trade towards the lower end of where it has been over the past month.
We have a fairly quiet week in terms of data and traders will continue to monitor the fallout from last week’s US jobs data and see whether there’s been somewhat of an overreaction (i.e. could there be a countertrend move). They’ll also be closely watching for any development out of the Middle East.
